Why Uganda’s current VAT act is not pro MSMEs

The VAT Amendment Act, 2023 expands the definition of electronic services and includes services supplied through an online or digital network by a supplier outside Uganda to a recipient in Uganda. This law potentially increases the tax burden on digital services, affecting small businesses and startups reliant on these services for their operations. As my grandfather always loved to tell us, “Don’t put a heavy bag on a baby.” I could equally say, don’t overtax businesses that are just starting up.  The VAT Amendment Act, of 2023 introduces provisions that are not pro micro-small and medium enterprises (MSMEs). Specifically:

  1. The VAT Act disallows input tax credits to registered foreign suppliers and limits input tax to activities directly related to output tax being accounted for. We see this restriction increasing the operational costs for businesses that rely on imported services or goods, as they are not able to claim VAT on these inputs against their output VAT.
  2. Changes to the First and Second Schedules, particularly the adjustments in the supply of certain goods like animal feeds and the removal of exemptions on others, have increased the cost of these inputs for businesses involved in agriculture and manufacturing.

How to empower MSMEs through VAT

  1. Increase the threshold for mandatory VAT registration to exempt more small businesses. This would reduce the administrative burden on small enterprises and allow them to focus on growth rather than compliance. It is too much hard work trying to comply with the URA VAT tax regime.
  2. Implement a simplified VAT filing and payment process for MSMEs. This could include quarterly rather than monthly filings, simplified online portals for VAT returns specifically for MSMEs instead of the generic form used by all businesses large or small, and more guidance services to help small businesses comply. Currently, the process is cumbersome and when the URA officials visit you, they are more about catching your “pants down” instead of proactive review to improve your compliance processes.
  3. Introduce targeted exemptions and zero-rating on essential services and goods that are crucial for MSME operations. Exemptions on VAT for all involved in education services, digital tools and solutions, and certain raw materials like paper and computers for educational purposes. I know, you will say, won’t the government-run burst due to a reduced tax base? The answer is no. Most of the time, the implication of new taxes is not carefully examined before they are introduced. The current taxes, if well administered, are still adequate to meet the growing needs of government. All that is required, is better use of the little taxes collected. As they say, “it does not matter how much you have or get, if you do not know how to use it, it will still not be enough.”
  4. Provide incentives and support for small businesses to participate in the digital economy. For example subsidies or tax credits for adopting digital payment systems, e-commerce platforms, and other digital innovations that can expand their market reach. With the increasing youth population, incentivizing online businesses has the potential to transform livelihoods. The government must establish Internet towns – specific towns with free Internet connectivity to grow the digital economy ecosystem and drive innovation.
  5. Allow input tax credit for digital services, especially for MSMEs that rely on these services for their operations. This could include software subscriptions, online marketing, and cloud services
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